Merrill, PaineWebber beat consensus

CBS.MarketWatch.com

NEW YORK (CBS.MW) -- Merrill Lynch and PaineWebber on Tuesday posted big upside profit surprises for the second quarter and left little doubt that the Internet will play a larger role in their futures.

Yet even as the firms gave center stage to their online forays, investors were given little direction on how executives expect the Internet to impact the bottom line.

PaineWebber
pwj
plans to roll out online trading capability in the third quarter for its single-fee-based accounts and is testing the model with some 120 customers right now.

The brokerage isn't ready to reveal how it will price its Internet-based accounts, PaineWebber's chief executive, Donald Marron, said. Marten Hoekstra, director of marketing for the private client group, told CBS.MarketWatch.com that the broker is not going to try to compete with the e-brokerages via low commissions. See video of Marron interview.

Clearly, Paine Webber is not backing off the full-service model. Hoekstra said the firm expects to see its network of 7,118 brokers expand to 8,000 by the end of next year as it goes after "wallet share" among customers, Internet-based or not.

Merrill averaged $500 million net inflow client assets per day in the quarter, and PaineWebber saw $2.6 billion a month, said Raphael Soifer of Brown Brothers Harriman. "The Internet is not producing the record numbers. The interesting thing to me, besides the bottom line, is the continuing inflows of client assets at these two full-service firms," Soifer said.

Online ambitions "may have an affect on the their stock price and how investors view them," he added, but the gains are coming from fees, investment banking and commissions.

Yet even as Merrill has been more forthcoming about its Internet plans, its own management changes are raising questions about the decibel level that the online debate is causing inside the nation's largest retail brokerage.

President Herb Allison's resignation Monday shocked Wall Street. See full story. Allison had been aligned with a more aggressive Internet stance, and his departure signaled a possible clash with the retail brokerage side of the business.

"It does suggest that what's not good for the broker is not good for the firm," said Michael Flanagan of Financial Service Analytics.

Allison was also seen as a member of a group that's been on the endangered-species list since the debt market blowout last fall -- the wholesale side. His resignation could be "delayed fallout" from last year, one analyst said. "He didn't make any friends" in the ensuing layoffs, the analyst said..

Merrill had no new comment about Allison's departure or who is in line to replace the president and chief operating officer. Allison quit the firm after learning he would not replace Chairman and CEO David H. Komansky, according to The Wall Street Journal.

Merrill's earnings

Merrill Lynch saw net income of $1.57 a share, well ahead of the First Call consensus for $1.46 and Merrill's $1.44 in the first quarter.

Net revenues reached a record $5.4 billion on gains in investment banking and asset management. Revenue from stock and debt transactions were down 26 percent from the first quarter to $1.1 billion amid a decline in revenue from equity revenue "non-U.S. trading activities," Merrill said.

Merrill's stock rose 1 3/8 to 79 1/4; PaineWebber was down 3/8 to 45 1/8, giving up earlier gains on its 8-cent surprise over the per-share consensus for its second-quarter profits. (The chart above compares Merrill's and PaineWebber's stocks over the past year.)

Merrill's stock is up 16.7 percent year to date, and PaineWebber is up 17.8 percent through Tuesday's close.

Meanwhile, E-Trade
EGRP, +0.12%
is up 227.6 percent and Charles Schwab
SC.H, +0.00%
is up 92.2 percent, according to LIMresearch.com. (The chart compares Merrill's and Schwab's 1999 stock performance.)

PaineWebber's earnings

The brokerage said profits in the June quarter rose 26 percent to $1.02 per share, or $163.5 million. Net revenue rose 16 percent to $1.35 billion vs. the year-ago period, boosted by gains in asset management and commissions.

PaineWebber said the report featured the strongest quarterly earnings and revenue in the firm's 119-year history.

"The quarter was very strong in retail business, which set the tone for these strong earnings," said Flanagan. "It's been a good market, which PaineWebber is well poised to take advantage of."

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